I am Project Director for Economics at American Principles Project, a public policy organization with initiatives on monetary policy and public pension reform. I write frequently for newspapers and magazines and my work has been published in the Washington Post and Investors Business Daily among others.

Rhode Island Tries To Not Become The Next Vallejo

On Thursday a special joint session of the Rhode Island General Assembly is expected to pass comprehensive public pension reform, which will be signed by Gov. Lincoln Chafee. The bill will switch part of pension compensation from a defined benefit to a defined contribution. It will also effectively wipe out the cost of living allowance save for potential increases once every five years.

Combined with other changes, the state’s actuary projects it will knock $3.2 billion off of Rhode Island’s $7.3 billion stated pension deficit. All in all, a bold move by a one-party-rule state.

But Rhode Island has been flirting with financial catastrophe, and its treasurer is no ordinary Democrat. Gina Raimondo, the author and champion of the pension reform plan, worked on Wall Street before founding Rhode Island’s first venture capital firm. She’s taken the route of being blunt about the state’s financial condition and what that portends for its people.

Ten percent of tax revenue now goes to retired public workers, which Raimondo projects will grow to 20 percent in the next decade. Benefits will have to be cut or social services will get the axe, she’s told upset citizens in town hall meetings around the state. Raimondo’s actuary didn’t even give the whole story: tabulating the state’s cost of unfunded liabilities according to financial economic valuation, Mercatus Center research fellows Eileen Norcross and Benjamin VanMetre say the real pension deficit is $12 billion.

Raimondo tells crowds she won’t let Rhode Island go the way of Vallejo, the bankrupt California city where pensions were spared at the expense of fire stations, police, and other basic services. Most Democratic leaders have signed on to the union position of the sacrosanct nature of pension benefits. They shouldn’t be so cursory, because this policy has the capacity to cripple social safety nets well beyond Vallejo. In a profile or Raimondo last month, Mary Williams Walsh of the New York Times wrote about her 2009 election, “Although she is a Democrat in a heavily Democratic state, she stood out because she refused to promise that state jobs and pension benefits would be protected no matter what.”

Having tried and failed to get anywhere with incremental changes in recent years, Rhode Island will soon have a hybrid pension structure that puts the bulk of contributions into a 401(k)-type plan that public workers can take with them to other jobs. This and other changes apply to current workers, not just new ones. It is in contrast to California Gov. Jerry Brown’s proposal, which only makes the switch for future public employees (who, as Utah Sen. Dan Liljenquist says, are not an effective lobbying force).

Raimondo’s plan has flaws. It stops short of removing the taxpayer guarantee from pension returns for workers, which could lead to unforeseen spikes in the state’s liability in the future. In the FAQ section on the treasurer’s website, it dismisses moving to a pure defined contribution model as too expensive, claiming it would cost an additional $882 million in contributions over the next five years. This is based on faulty actuarial methodology that speeds up pension contributions when a defined benefit plan is closed. Furthermore, Raimondo is still significantly undervaluing Rhode Island’s pension debt by not using the financial valuation as applied by the Mercatus Center. This means billions more in unfunded liabilities left to sort out.

Once the Rhode Island Retirement Security Act plan passes Thursday, the next step will be for the state’s cities and towns to move on this. To do so, they will need “enabling legislation” from the statehouse to restructure their own pension systems.

The urgency is as dire at the local level as it is at the state level. One city, Central Falls, filed for bankruptcy in August when its pension fund ran out of money. Its receiver is trying to cut retired police and firefighters’ pensions.

Cranston’s mayor Allan Fung told the New York Times he’ll have to scrap garbage collection and senior citizen services, among other things, if he doesn’t get pension reform. “No more Vallejos” might as well be the rallying cry.

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